When Nationstar Mortgage Holdings (NYSE:NSM) came public in early March, investors weren’t impressed. The deal was priced at $14, which was below the $17 to $19 price range. Even worse, the first-day performance was a meager 1.4% rise.
But this turned out to be a big opportunity. Consider that NSM shares are now trading at $34.66.
So what happened? Of course, it helped that there was a nice rally in the equities markets. Oh, and the real estate sector went on a tear. This was especially the case with the homebuilders like KB Home (NYSE:KBH), Lennar (NYSE:LEN) and Ryland (NYSE:RYL).
But this is only part of the story. In fact, NSM’s S-1 held some interesting clues that indicated the company could be a winner.
First of all, NSM is a servicer for residential mortgages. It’s not an exciting business, but it usually generates steady cash flows.
Also, a mortgage servicer needs to constantly build its loan portfolio. And NSM was actually the best in the industry. Since 2007, the average growth rate in the mortgage portfolio was a sizzling 70.2%. Because of this, the company’s fee income skyrocketed. From 2009 to 2011, it went from $78.9 million to $377.7 million.
It certainly helped that NSM has a top-notch reputation in the industry and a highly automated infrastructure. Customers include banks, government entities and private investment firms.
But NSM has also invested resources in customer support, monitoring systems and analytics, which have been crucial in dealing with the risks of foreclosures.
Still, there was something even more important: The company has benefited from mega changes in the mortgage industry. Essentially, banks are leaving the sector because of the onerous regulations and costs. They simply don’t have the bandwidth to be efficient mortgage servicers.
In other words, NSM has been a huge beneficiary of new business. More important, it looks like this will be the case for the next several years. According to the company’s S-1: “Banks’ mortgage servicing operations, which have historically been oriented towards payment processing, are often ill-equipped to maximize loan performance through high touch servicing.”
When it comes to IPOs, it’s often a good idea to find companies that are benefiting from disruptive industry changes. That has been the case with breakout players Amazon (NASDAQ:AMZN) and Salesforce (NYSE:CRM). And yes, the gains can be substantial. It’s even better when Wall Street initially fails to notice, as with NSM.
Tom Taulli runs the InvestorPlace blog IPOPlaybook, a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of “How to Create the Next Facebook.” Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.